InvestorQ : What are some unknown facts about the new fund offer?
simran Kaur made post

What are some unknown facts about the new fund offer?

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Anushri Vasa answered.
1 year ago
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The biggest mistake that most of us do is to consider NFO at par with IPO. Generally, in any NFO even after 15-20 days of its launch, you can subscribe to it, and there will not be much that you will miss in that fund during that period. So, stop treating NFO at par with IPO, as both are different.

Now, there are several other things that no mutual fund company will share about NFO:

Expense Ratio: SEBI has placed a limit on what percentage of the fund could be charged as expenses, and the expense ratio you see is the average expense ratio of the entire fund.

For example, the average expense ratio for a fund with an AUM of 5000 crores, shall be:

AUM (In Rs crore)TER for equity fundsExpense (In Rs crore)
0-5002.2511.25
500-75025
750-20001.7521.875
2000-50001.648
86.125

Average Expense Ratio = 86.125/5000*100 = 1.72%

This is the maximum average ratio that a fund could charge from the investors. Now, as the fund size increases, the expense ratio is decreased. The main earning to a fund house is from the expense ratio only.

So, sometimes, fund houses launch new fund offer to fall in the highest expense slab and to recover the maximum amount from investors. So, it becomes an earning tactic for the fund house.

2. Size of the AUM: Sometimes, the fund houses face issues because of the size of the fund. For example, if a fund house has a small-cap fund of about 5000 crores AUM, he will earn lower returns comparatively. Even if some of these stocks fetch more than 100% return, it would still be less for the fund as a whole. Say, 2-3 small-cap are generating returns of 100 crores each after an investment of Rs 100 crore in each (because of the limit in investment in small caps). The average return for the entire fund would be 300 crore/5000 crore, which is 6% for the entire fund. Due to this limitation placed because of the size of the fund, these houses come up with different and new fund offers that invest in a diversified category of funds.

3. Even though SEBI has allowed only a maximum of 36 categories of investment, one of them being thematic fund, fund houses launch funds under various themes. This gives them the benefit of launching new funds even under the same category.
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